Jerusalem — Israeli officials believe the nation’s economy can withstand the current conflict with Hamas, as it has with past disputes.
However, a declining currency (the shekel) and insights from independent economic experts interviewed by TRENDS suggest a more challenging and bleak outlook if the Gaza conflict escalates into a full-blown confrontation with Lebanon’s Hizbollah militia. This Shiite fundamentalist group possesses a significantly larger and more powerful missile arsenal than Hamas, potentially causing greater human and material damage to Israel.
“The primary economic threat is a two-front war involving Hizbollah,” said David Rosenberg, economics editor for the Haaretz English edition, in an interview with Trends. Israel initiated its assault on Gaza following an October 7 incursion by Hamas that resulted in the death of 1,400 Israelis, some tragically perishing in their homes.
Approximately 200 individuals were taken as hostages to Gaza on this deeply distressing day in Israeli history. Israeli leaders are determined to dismantle Hamas, a goal many analysts believe will be challenging, if not unattainable.
At A Glance Economic Impact of Conflict * Israeli officials believe the economy can withstand the current conflict with Hamas. * Independent experts predict a bleak outlook if the Gaza conflict escalates with Hizbollah. * Hizbollah has a more powerful missile arsenal than Hamas, posing a greater threat. Economic Threats * David Rosenberg identifies a two-front war involving Hizbollah as the primary economic threat. * The shekel has been declining, with people selling shekels to purchase dollars and transferring funds out of Israel. * The Bank of Israel intervened by using its dollar reserves, but the shekel's decline persisted. Conflict Overview * Israel's assault on Gaza was in response to a Hamas incursion that led to significant Israeli casualties. * Israeli leaders aim to dismantle Hamas, a challenging endeavor. * Palestinian death toll is rising, with Israel intensifying its ground operations. * Tensions are high at the Israel-Lebanon border. Economic Indicators * The shekel's value against the dollar has been dropping. * Concerns about a potential price surge due to the shekel's depreciation. * Standard & Poor's shifted its outlook on Israel's credit rating to "negative." * Mobilization of workers and students for military duty disrupts the economy. High-Tech Industry * Israel's high-tech industry is showing signs of strain. * A survey revealed a significant percentage of companies affected by the war. * Only 16% of the surveyed companies claimed no impact. Economic Strengths * Israel has a reasonable debt-to-GDP ratio and low unemployment. * The country can endure temporary economic challenges. * Historical resilience shown during the second intifada. Potential Challenges * A prolonged conflict could lead to widespread economic harm. * Comparisons drawn to the economic impact of the 1973 war. * Concerns about inflation and potential interest rate hikes. Political Landscape * Concerns about Finance Minister Bezalel Smotrich's suitability for the current situation. * Bank of Israel Governor Amir Yaron is seen as a stabilizing figure. Public Sentiment * Trauma from the events of October 7 affects public confidence. * Reduced consumer activity observed. * Societal rifts temporarily shelved due to the national crisis. Conclusion * Despite some positive aspects, the overall situation remains challenging and uncertain.
With Israeli aircraft continuously targeting Gaza and the Palestinian death toll nearing 8,000, as reported by the Hamas-led health ministry, many of whom are children, Israel also intensified its ground operations in anticipation of a potential full-scale invasion.
The Israel-Lebanon border remains tense, with reciprocal attacks between Israel and Hizbollah.
The trajectory of this conflict remains uncertain, but it’s clear it will result in an even higher Palestinian casualty count and increased unrest in Israel, given its most significant security challenge in over 50 years. This uncertainty is devaluing the shekel, which had already been under pressure since January due to concerns about Benjamin Netanyahu’s intentions to undermine the judiciary in ways that could adversely affect the nation’s tech industry.
“War poses a significant threat to the economy, especially in uncertain situations where the potential risks are still unknown but could be substantial,” Rosenberg said. “People are looking to exit, selling shekels to purchase dollars and transferring funds out of the country.”
On October 9, the Bank of Israel intervened, utilizing some of its dollar reserves to purchase shekels. However, the shekel continued its decline. The data is not promising, though a silver lining is the central bank’s substantial dollar reserves. On January 24, one dollar equated to 3.36 shekels. By October 9, the first trading day post the Hamas attack, it rose to 3.95, and by Friday (October 27), a dollar was valued at 4.08 shekels.
“The worry is if the depreciation continues or spirals into a freefall, prices could skyrocket. Israel already grapples with a high cost of living, and any price surge would dampen morale during wartime, adding another layer of concern,” Rosenberg said.
In the meantime, international agencies are adjusting their perspectives on Israel. However, this doesn’t necessarily signal an impending credit rating downgrade. The outcome largely hinges on the war’s progression and the nation’s resilience if the conflict broadens. On October 25, Standard & Poor’s shifted its outlook on Israel’s credit rating from “stable” to “negative.”
Another potential detriment to the Israeli economy is the disruption stemming from the mobilization of approximately 300,000 workers and students for reserve military duty. Yannay Spitzer, an economist at the Hebrew University of Jerusalem, informed Trends that forty percent of his students have been summoned for reserve duty.
“When there’s full military mobilization, the workforce is diverted from producing goods and services, which will inevitably reduce production levels,” he said.
“The real question is the duration of this situation,” he emphasized.
Israel’s primary economic driver, the high-tech industry, is exhibiting signs of strain due to the war and the mobilization of reservists. On October 24, the financial daily, The Marker, referenced a survey conducted by the Israel Innovation Authority and the Start-Up Nation Policy Institute (SNPI). Out of 507 companies and startups surveyed, 84 percent reported being affected by the war. Forty-three percent indicated harm in terms of human capital, 27 percent reported damage in both human capital and funding, and 14 percent cited only funding issues. A mere 16 percent of the companies claimed they remained unscathed.
However, Spitzer noted that, in some ways, Israel is confronting the war from a position of strength. He emphasized that the country isn’t grappling with a debt crisis, boasting a “reasonable” debt-to-GDP ratio of 60 percent. Additionally, unemployment stands low at four percent.
“As long as the situation appears temporary, spanning a year or two, Israel can endure it. We might witness negative growth and a severe recession, but not a total economic collapse,” he said.
He recalled how the Israeli economy had rebounded effectively from an economic downturn that initiated around the onset of the second intifada, which persisted from 2000-2005.
Yet, if a ceasefire proves to be just a brief respite, more significant challenges could arise. Echoing Rosenberg’s sentiments, Spitzer warned that a regional conflict could inflict widespread economic harm. He drew parallels to the substantial damage wrought by the 1973 war against Egypt and Syria.
“In 1974, a third of the economy was allocated to security. The Israeli economy was stretched to its limits, debt surged rapidly, followed by hyperinflation,” Spitzer added.
Should the anticipated Gaza invasion falter, it might further depress the shekel, stoking inflation. This could compel the Bank of Israel to hike interest rates, Spitzer suggests. Consequently, the public’s wealth might plummet as real estate, stocks, and bonds depreciate in value.
Adding to the uncertainty, some economists feel that Finance Minister Bezalel Smotrich, leader of the far-right Religious Zionism party, is ill-suited for the current situation.
Viewed as an ultra-nationalist with no economic background, Smotrich secured his position due to the coalition preferences of Benjamin Netanyahu. Many economists are now looking to Bank of Israel Governor Amir Yaron for stability and guidance.
Capturing the current sentiment of Israel’s business community, Rosenberg said, “The mood mirrors the national sentiment. People are still processing the trauma of October 7. It impacts their confidence. Folks aren’t in the spirit to dine out or purchase appliances. The stores are deserted.”
On a positive note, the societal rifts ignited by Netanyahu’s contentious attempt to undermine the judiciary have been temporarily shelved, Rosenberg observes. However, he said, “This unity emerged in the face of a national crisis.”
“While there’s a silver lining, the clouds bearing it are ominously dark,” Rosenberg added.